Bluff purchased equipment for business use for $35,000 and made $1,000 of improvements to the equipment. After deducting depreciation of $5,000, Bluff gave the equipment to Russett for business use. At the time the gift was made, the equipment had a fair market value of $32,000. Ignoring gift tax consequences, what is Russett's basis in the equipment

Question

Catalina Hensley

Business

4 November, 19:48

Bluff purchased equipment for business use for $35,000 and made $1,000 of improvements to the equipment. After deducting depreciation of $5,000, Bluff gave the equipment to Russett for business use. At the time the gift was made, the equipment had a fair market value of $32,000. Ignoring gift tax consequences, what is Russett's basis in the equipment

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Answers (1)

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Kyla Chapman · Answer 1

After ignoring the gift tax basis, the Russett's basis in the equipment is equal to $31,000

Explanation:

For answering this question it is important that we have knowledge of the IRS publication 555, according to which we can take out the donee basis in the property (in this case donee is Russett's) in the situation when market value of the property is equal to or greater than the donors (Bluff) adjusted basis.

Then the donee basis will be equal to the donors adjusted basis of property.

In this case we will first take out donors (bluff) adjusted basis for equipment,

= $35,000 (purchase value) + $1000 (improvement) - $5000 (depreciation)

= $31,000

So here we can say that donors adjusted basis is less than market value, so in this case the russetts basis will be equal to bluff adjusted basis for property which is equal to $31,000.